Last December, Tenneco Inc. was about to settle a batch of shareholder suits when a Texas judge discovered an undisclosed side deal between a plaintiff's lawyer and the mediator overseeing the negotiations. The two had agreed that the supposedly neutral mediator, a former state court judge, would share in the award. Tenneco agreed to settle for $35 million. Based on that figure, the mediator would receive $250,000 for just one day's work. But after the judge blasted the deal as unethical and refused to approve it, the parties slashed the fee to $30,000. Both the attorney and the mediator deny that they had a prearranged pact.
The incident, while isolated and extreme, points up the risks of an increasingly popular phenomenon: Driven by soaring legal bills and gridlocked courts, companies are turning to mediation and other out-of-court settlement techniques. Known as "alternative dispute resolution," such procedures are quicker and cheaper than litigation.
CONFLICTS OF INTEREST. Their growing appeal is feeding a booming cottage industry of resolution companies and rent-a-judges. But there's a catch: Because the field is virtually unregulated, anyone with a business card can call him- or herself a mediator. And now, concerns over conflicts of interest and quality control are starting to spread. "There are very few standards," says Carrie Menkel-Meadow, a law professor at the University of California in Los Angeles. "There have been abuses."
States and industry groups are aware of that, but they are clashing over how to proceed. And mediators aren't their only worry. For the past decade, courts have urged -- or required -- parties to use alternatives to litigation. Yet experts note that parties may be naive about such procedures and have little say over who settles their cases.
In some states, the problems may start with the judges who farm out the cases. In Texas, a task force of the state Supreme Court has been probing appointments by judges, including mediators. It found practices that raise at least the appearance of impropriety. Among them: judges who refer a disproportionate number of cases to the same mediators -- who also happen to be campaign contributors -- or who solicit mediators for contributions. In other instances, judges indiscriminately dumped piles of cases on mediators without even notifying the parties. The task force will soon release a report recommending ways to rectify such practices.
When parties find their own mediators, quality is rarely a problem. The market is bursting with lawyers, psychologists, and other professionals who will resolve conflicts for a fee. Still, impartiality is not guaranteed. One risk is favoritism by so-called neutrals toward lawyers or firms who have hired them before or who provide a key source of income. "When they get paid and if it's lucrative, they will want to be picked again," charges Detroit lawyer Sheldon L. Miller.
NO BRAIN DRAIN. Many people in the resolution business say they don't find a great deal to be concerned about. The nonprofit Institute for Social Analysis in Monterey, Calif., has just completed an 18-month study of private judging in three busy California courts. The study found no evidence that private judges were seeking repeat customers. Nor was there a dramatic difference between awards and the method by which cases were settled. And there was no brain drain of good judges from the bench. At the same time, the report concluded that private judging didn't lighten the courts' load.
Still, some providers are fretting that rivals "might do something to give the field a bad name," says lawyer Michael D. Young, who heads Endispute Inc.'s New York office. To help prevent that, the industry is trying to set standards. In fact, training and certification programs are a growing business in their own right. Pepperdine University, through its law school, has a certification program. Florida requires court-appointed mediators to have 40 hours of training and be certified by the state Supreme Court. And Colorado and Texas are regulating mediation. Still, until more states follow -- or until the market weeds out incompetents and cheats -- the best rule is: "Buyer beware."
TABLE: HOW TO PICK A MEDIATOR
-- Find mediators through well-established nonprofit groups or private companies that screen candidates and have ethics codes
-- Research the mediator's background, training, and experience, especially in the area in dispute
-- Probe parties who have used the mediator in similar cases for signs of favoritism. Also, question the mediator's ability to promote settlements
-- Never agree to a settlement before consulting with an attorney, accountant, or other expert for advice